Impairment Of Assets: MFRS136 And Disclosure Requirements - A Case Of Denko Industrial Corp.

Critically review MFRS136 Impairment of Assets and discuss how imparment are presented and disclosed in the annual report of a Maaysian company listed on Bursa Malaysia. Select one company only from any sector that has impairment exercise reported in its current annual report.

Overview of Denko Industrial Corp.

This report contains detail information about the standard MFRS136 which is related to impairment of assets. It also shows the manner in which the impairment is been disclosed and presented in the annual report of the selected company that operates in Malaysia. The company is Denko Industrial which is listed on Bursa Malaysia and is an investment holding company. The later part of the report discusses the requirements of disclosure and the format followed by Denko for reporting its impairment exercise. In addition to that, the recognition and measurement of MFRS136 is also discussed. All the findings of the report are then presented in nutshell under the head summary, followed by the conclusion. The discussion made in the report is been summarized in the last part of the report and is presented in a concise manner.

Denko Industrial Corporation Berhad is an investment holding company which operates in the country named Malaysia. It was incorporated in 1989 under the name Ecodynamic (M) Sdn Bhd. Later on it change the name to Denko Industrial and in 1990, it was transformed into a public listed company and get listed on Second Board of Kuala Lumpur Stock Exchange- Bursa Malaysia in 1991, the year when the history of expansion began for Denko (Denko. 2018).

The segments of the company include snack food, plastic and moulding and others. Snack food segment is involved in the trading of food stuff and consumer goods. The section operates as a wholesaler and trader provide consumable food items across the country. Another segment named as plastic and moulding is engaged in manufacturing or designing of plastic moulded elements and products. These components are later sold in both domestic and international markets (Reuters. 2018). The other divisions of the company deals with the investment holding. Denko also provides management services to its customer and operates in countries other than Malaysia, popularly known as United States of America, Asia – Pacific and Europe. There are many subsidiaries of the company that are engaged in providing food stuff and plastic parts. Winsheng Plastic Industry Sdn. Bhd., PT. Winsheng Plastic and Tooling Industry and Lean Teik Soon Sdn. Bhd are the subsidiaries involved in the manufacturing of plastic components and tooling fabrication along with the selling of consumable goods (Bloomberg. 2018).

The key products of the firm are vacuum foams, packing materials, lease property, plastic raw materials and pipes, garments made up of polyester, cotton and many other fabrics. It also produces various types of chemicals and semi-finished products. Talking about the financial highlights, the revenue of Denko has increased to RM 102 million in 2017 as compare to the previous year. However, despite of an upsurge in sales, the company has reported a net loss amounted to RM 11,289 thousands in year 2017 as compare to the profit made prior to that (Bloomberg. 2018). This has eventually resulted in the deduction of shareholders’ funds from RM 56 million to RM 45 million. In addition to that, the EPS of the company was negative due to the loss and the amount of total assets has also reduced in 2017. Overall, it can be said that Denko needs to improve its performance in order to enjoy growth and success. As the company is publically listed on Bursa Malaysia, it is traded with a ticker of DICM.KL (Reuters. 2018).

Financial Highlights

Malaysian Accounting Standards Board (MASB) developed and introduced a framework which consists of certain standards which are required to be followed by every Malaysian company listed on Bursa Malaysia. The framework is named as the Malaysian Financial Reporting Standards (MFRS). Adopting such framework is considered as a significant milestone in the capital market as it enables the companies to fully comply their financial statements with the International Financial Reporting Standards (Lhaopadchan, 2010). From the pool of guidelines, there is one standard named as MFRS136 which basically deals with asset impairment. According to this standard, an asset is been impaired by the company when its carrying amount is irrecoverable from its continuous use or sale. The entity is required to report the impaired asset, if any. It has to compare the recoverable amount of that asset with its carrying amount in order to determine the value of impairment (Reinstein and Lander, 2004).

The MFRS 136 states the recognition, disclosure and measurement for the impairment of assets covered by MFRS 116 and 117 along with the PPE. In addition to that, intangible assets covered in the standard MFRS 138 and goodwill (Devalle and Rizzato, 2017). The items of disclosure requirements under MFRS136 that are represented in the annual report of Denko Industrial Corporation are:

1. The amount of impairment losses is required to be disclosed which is documented in the income statement of the company in its annual report.
2. Reversal of impairment loss is also recognized in the income statement of during the period.
3. Another requirement is to recognize the nature of asset along with the amount of impairment loss.
4. Disclosing the circumstances and situations that resulted in reversal and recognition of loss on impairment.
5. Disclosure of the basis on which the net selling price, discount rate used and value in use is determined (Ernst and Young. 2010).

The above items are the disclosure requirements of the Malaysian standards MFRS 136 and all of them are been properly presented in the annual report of Denko for the year 2017. The company has reported impairment loss on trade and other receivables, property, plant and equipment and on investment in subsidiaries (Abuaddous, Hanefah and Laili, 2014). In addition to this the amount is been recognized in the statement of comprehensive income and also if in future the value reduces will result in reversal of the previous loss shown in the statement. Also while reporting the same, Denko has disclose about the nature of asset, whether financial or non-financial. In investment in subsidiaries, the loss amount is equal to RM 22,110,594 in 2017 and in 2016 it was RM 15,468,660. In PP&E, the loss amounted to RM 4,168,596 and the reversal of loss on trade receivables was RM 176,418 was reported in the financial year 2017. The total impairment of assets was amounted to RM 4.2 million in 2017 (Denko. 2017).

The accounting policies of Denko are in proper compliance with all the requirements and provisions of international Financial Reporting Standards (IFRS), Malaysian Financial Reporting Standards (MFRS) and the Companies Act 2016 applicable in Malaysia. The company has applied various Malaysian standards for reporting their financial information. Out of them, MFRS 136 is been applied for impairment of assets and MFRS 107 is applied for disclosure initiative. Provided below is the sample of how Denko has disclosed the impairment of assets.

MFRS136: Impairment of Assets

Above are the abstracts from the annual report of Denko Company and the sample showing the format in which, the firm has represented or disclosed the information about the asset impairment. Denko Industrial discloses all the information about impairment under the section notes to financial statements. It contains the reasons identified for impairment, assets that got impaired and their evaluation. According to the disclosure compliance, company is required to assess the factors that indicates the chances of impairment and should report the same in its annual reports. Following indications are there as prescribed by the standard, which requires impairment.

External sources

1. The decrease in the market value of the asset during a specific period is more than the estimated reduction due to normal usage.
2. When market capitalization of an asset is more than its carrying amount.
3. The significant changes affecting the legal, technological, economic environment and market, to which a particular asset is associated.

Internal sources

1. Availability of evidence related to the damage or obsolescence of a physical asset.
2. The presence of the evidence that the asset’s economic performance will get worse than its current performance in the near future.
3. When the recoverable amount is higher than value in use and fair value net of selling expenses.
4. Changes in the operational plans or strategy of the organization such as discontinuing an operation or disposing an asset.

All the above indications do call for asset impairment and are required to be disclosed by the companies in their annual report. Denko Industrial discloses the assets impaired by it during the financial year 2017. It also shows the reasons for doing in the same in the section named as impairment. Apart from the indications, the loss on impairment recognized by Denko is also explained in the above abstracts of the company. The above listed five items of disclosure are been clearly disclosed in the annual report of Denko Industrial for the year 2017. Apart from the items, the reasons for recognizing the impairment losses is also clearly represented in the report of the company.The above abstract discloses the impairment of property, plant and equipment done by Denko. It shows the area of focus and the reason for focusing the same. It has followed certain procedures to figure out the amount of value-in-use and details of budgets. In addition to that, the impairment losses on PPE, receivables and investment in subsidiaries are clearly shown in the cash flow statement. Moreover, all the calculation performed in relation to impairment is been clearly disclosed in notes to financial statements.

The requirements for recognizing and measuring the amount of impairment are stated out in MFRS 136 which is been applicable by the companies for impairment of assets. According to the standard, a tangible asset having a long life is impaired when the entity is not able to recover or recoup the carrying amount of that asset neither through selling it nor by using it. Companies are required to review the indicators related to the assets on annual basis in order to know about the probability or chances of impairment (Rahman and Mohamed, 2018). This is how the entities recognize the assets which are required to be impaired. The above discussed internal and external sources of indications are been kept in mind during the process of review. In case if any of the indications is present, then the company is required to figure out the estimate of recoverable amount. Also the assessment of each asset is required at the end of each reporting period. In case of intangible assets, their ability to generate future economic benefits is highly subject to the uncertainty. In that case, the standard allow the entities to conduct an impairment test on an annual basis (Che Azmi and English, 2016)

Disclosure Requirements of MFRS136 in Denko Industrial Corp’s Annual Report

Apart from the above discussed internal and external sources, the indication by which company can recognize impairment for the investment in subsidiary is by recognizing the amount of dividend received from that investment with the following evidence:

• Investments’ carrying amount in separate financial statements is more than the carrying amount in the consolidated financial statements of net assets; or
• The amount of dividend is more than the total comprehensive income of the subsidiary company, in the period when the dividend is declared ( 2017).

Talking about impairment loss of individual asset, it is recognized in the income statement of the company only when the recoverable value is less than the carrying amount. The entity must immediately recognize the loss in income statement. However, previously if the asset is evaluated and there is a credit balance of the same in the revaluation account, then the amount of loss on impairment must be taken to revaluation amount (Lobo, et. al., 2017). After recognition, the same is been calculated by subtracting the recoverable amount of the asset from its carrying amount. The recoverable amount of the asset is higher of the following:

• Value-in-use.
• Net selling price

Value in use is calculated by aggregating the present values of the cash flows that are estimated by making a continuous use of asset or from its disposal. NSP is equal to the amount at which the particular asset is been sold in the market. The asset’s value carried out by the balance sheet of the firm is known as the carrying amount. However, the value of impaired loss can be reversed in the cases where the recoverable amount is more than the carrying amount (Schwarzbichler, Steiner and Turnheim, 2018). The reversal amount must be recognized in the statement of financial performance of the company. However, if the loss on impairment is already charged to revaluation account, then such reversal income should also be recognized in the revaluation reserves by writing back the loss which was earlier recognized. In addition to that, after the reversal, the amount of depreciation and amortization should be readjusted for the future periods (Shaari, Cao and Donnelly, 2017). According to the standard, the guidelines for measurement and recognition of impairment loss of individual asset is same for cash generating units also. It prescribes the manner in which the carrying amount of CGUs can be identified and the loss of impairment can be allocated between the assets of unit.

Above discussion shows the standards of recognizing and measuring the impairment value of the assets. It shows how companies calculate the amount of impairment losses, recoverable figure and carrying amount of an asset which is to be impaired. Denko Industrial has considered all the requirements of measurement and recognition of impairment as prescribed by MFRS 136 in its annual report.

From the above discussion, following are the key points which explains the whole information discussed above in a nutshell.

• Malaysian companies operating their business in Malaysia are required to comply with all the requirements of the Malaysian standard named as MFRS 136 – Impairment of assets for the purpose of getting their assets impaired.
• All the items of disclosure, measurement and recognition must be properly presented in the annual report of the companies.
• Denko Industrial Corporation is the one which has applied MFRS 136 in its financial reporting and has followed all the requirements of the standard.
• The company operates through various segments which are related to making and moulding plastic materials, offering snack food and one segment operates as an investment holding company.
• The key products of the company are packing materials, vacuum foams, garments made up of cotton and other fibres.
• Denko properly presents all the items of disclosure in its recent annual report. It shows all the information in its notes to financial statements.
• The amount of impairment losses and the circumstances that causes impairment are disclosed in the annual report.
• Recognition and measurement requirements of MFRS 136 are discussed above.
• The loss on impairment is measured only when the assets’ recoverable amount is less than its carrying amount.
• Higher of value in use and net selling price determines the recoverable amount of the asset.
• Carrying value means the figure at which the asset is been carried out in the balance sheet of the company.
• Overall, it is very important for Denko to comply with all the requirements of MFRS 136.

Conclusion

The above report concludes that it is very much necessary for the Malaysian companies to follow all the guidelines and requirements described by the standard which is applicable for impairment of assets. The amount of impairment loss and other values must be calculated as per MFRS 136 and should be disclosed in the annual report of the company. The treatment of the same must also be presented.

References

Abuaddous, M., Hanefah, M.M. and Laili, N.H., (2014) Accounting standards, goodwill impairment and earnings management in Malaysia. International Journal of Economics and Finance, 6(12), p.201.

Bloomberg. (2018). Denko Industrial Corporation Bhd. [Online]. Available at: https://www.bloomberg.com/quote/DEN:MK [Accessed 16 July 2018].

Che Azmi, A. and English, L.M., (2016) IFRS Disclosure Compliance in Malaysia: Insights from a Small?sample Analytical Study. Australian Accounting Review, 26(4), pp.390-414.

Denko. (2017). Denko industrial corporation Berhad Annual Report. [Online]. Available at: https://www.denko.com.my/data/cms/images/1502779902_denko%20annual%20report%202017.pdf [Accessed 16 July 2018].

Denko. (2018). Corporate History. [Online]. Available at: https://www.denko.com.my/usr/pagesub.aspx?pgid=29 [Accessed 16 July 2018].

Devalle, A. and Rizzato, F., (2017) IFRS 3, IAS 36 and disclosure: The determinants of the quality of disclosure. GSTF Journal on Business Review (GBR), 2(4).

Ernst and Young. (2010). Impairment accounting – the basics of IAS 36 Impairment of Assets. [Online]. Available at: https://www.ey.com/Publication/vwLUAssets/Impairment_accounting_the_basics_of_IAS_36_Impairment_of_Assets/$FILE/Impairment_accounting_IAS_36.pdf  [Accessed 16 July 2018].

IFRS. (2017). IAS 36 Impairment of Assets. [Online]. Available at: https://www.ifrs.org/issued-standards/list-of-standards/ias-36-impairment-of-assets [Accessed 16 July 2018].

Lhaopadchan, S. (2010). Fair value accounting and intangible assets: Goodwill impairment and managerial choice. Journal of Financial Regulation and Compliance, 18(2), 120-130.

Lobo, G.J., Paugam, L., Zhang, D. and Casta, J.F., (2017) The effect of joint auditor pair composition on audit quality: Evidence from impairment tests. Contemporary Accounting Research, 34(1), pp.118-153.

Rahman, A.A. and Mohamed, A.S., (2018) Investigating the Early Implementation of MFRS 136 Disclosure among Top 50 Firms in Malaysia. Asian Journal of Accounting and Governance, 8, pp.59-76.

Reinstein, A., & Lander, G. H. (2004). Implementing the impairment of assets requirements of SFAS No. 144: An empirical analysis. Managerial Auditing Journal, 19(3), 400-411.

Reuters. (2018). Denko Industrial Corporation Bhd (DICM.KL). [Online]. Available at: https://www.reuters.com/finance/stocks/companyProfile/DICM.KL [Accessed 16 July 2018].

Schwarzbichler, M., Steiner, C. and Turnheim, D., (2018) Impairment of Assets (Fixed Assets and Goodwill). In Financial Steering (pp. 343-370). Springer, Cham.

Shaari, H., Cao, T. and Donnelly, R., (2017) Reversals of impairment charges under IAS 36: evidence from Malaysia. International Journal of Disclosure and Governance, 14(3), pp.224-240.